Every retirement vehicle has become less certain due to the less predictable, lower-returning mutual funds underpinning most of them. There is the old joke about annuities is that you make a fortune on the headline and then the fine print takes it all back. There is a lot of annuity bashing, but if you understand them, you might be surprised.
A recent study by the Federal Reserve, the Survey of Consumer Finances, found that Americans’ retirement savings in IRA and 401(k) plans are not quite as solid as they should be. If you’re going to be successful with your retirement savings, it is critical that you understand the fees and expenses you are incurring. The impact of fees cannot be understated. The 1 % difference in fees and expenses would reduce your account balance at retirement by 28%.
If you compare a mutual fund, investors must pay sales charges, annual fees, and other expenses regardless of how the fund performs. And, depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive — even if the fund went on to perform poorly after they bought shares.
With the Dow Jones index of leading US shares still rising steadily – it is up nearly 11 per cent in a year – some may feel investors are getting in too late to get great returns in the US stock market. However, is the US stock market still a good buying opportunity and what is the cheapest way to buy and trade shares on Wall St? It’s always about dollars and cents when the investment industry tries to make the case for getting financial advice, not the professionalism of the people offering the guidance.
In the investment industry’s world, it’s all about the money. That’s why they toss numbers at you instead of trying to address the fact that the title “adviser” is just a word, not a profession backed by universal standards of training, transparency, ethics and regulatory oversight with clout. Pretty much anyone can call himself an adviser.
Complicating the situation even further is the fact that “adviser” is only one term used for people who sell investment products and/or advice. There are also brokers, financial planners, wealth consultants and money coaches, to name just a few.
As an investor, choosing a broker is one of the most important decisions you’ll have to make. As we enter this new age, we’ve got to rethink how we invest. Because, think about this… if you’re paying as much as 2% a year in total fees (which is about normal), you’re giving up a third of your profits to your broker.
A brokers fee is no bargain either, running at least at an average 1.5 percent fee against your total account value each year for advisory clients. In 10 years, you lose 15 percent of your total account value (per obtained value each year) since the advisory fee is taken against the whole account. If the account does grow, so does your advisory fee.
401(k) plan fees and expenses can be separated into three categories. First, there are plan administration fees. Plan administration fees cover the day-to-day expenses of operating a qualified retirement plan, paying for items like record-keeping, accounting and legal services, trustee services and third party-administration..
Second are individual service fees which are participant-driven and cover things like self-directed account costs, loans, withdrawals and QDROs, which are qualified domestic relations orders. Individual service fees are typically charged to the participant.
Third are the investment fees. They are very important to understand and are usually the largest component of plan fees and expenses. You need to check to see what mutual fund share class is being used in your plan.
Some plans offer institutional shares while others have retail shares. Retail shares have different types of loads. “A” shares charge a front-end load. “B” shares charge a back-end load. “C” shares have a higher ongoing trail fee, generally an additional 1%. Index funds are typically low-cost and should be an option available to plan participants.
Another type of common investment fee is the 12b-1 fee. 12b-1 fees are ongoing fees paid out of the fund’s net asset value on a daily basis. They can be used to pay commissions to brokers or other salespeople, to pay for advertising and other costs of promoting the fund and to pay other service providers in a bundled-services arrangement, including record keeping and third party administration. No-load funds can have 12b-1 fees.
Most load funds have 12b-1 fees in addition to the load or commission. These fees are disclosed in the fund prospectus, but very few participants understand their significance. Some plans offer exchange-traded funds (ETFs) which have been slow to catch on, but can provide participants with a lower-cost fee structure than retail mutual funds.
Annuities have no fees or charges – they are a spread product, which means the insurance company has to make more money than what they are paying in order to make a profit. Any “loads” are part of the pricing of the product. You will know exactly how much you will receive for the stated period of time and the premium you give them.
Annuities are structured differently from other accumulation vehicles and over time generates similar commissions to other comparable products. Commissions on common stock, bonds, and mutual funds initially seem to be generally lower than the commissions earned on annuity sales but those commissions come right off the top of the funds invested, meaning less actual money invested.
The largest difference is: “100% of the deposit” earns interest from dollar one. Additionally, liquidity is the ability to get your money out of an investment in a timely manner without undue costs. Annuities, like bank certificates of deposit, impose early withdrawal penalties on investors who take their money out before a period of time agreed up front.
If you don’t cash it in early, you won’t ever pay these charges. A 5-10 percent surrender charge especially when at the end of the surrender period, that charge will not exist and not one dime will be taken from annuity values in most plans. Those back loaded surrender charges the client pays nothing as long as they hold to maturity.
Our deserved and earned annuity sales commission fee is NOT incurred unless a client cancels prematurely. Since they are back loaded in almost every plan and eventually disappear, they do no harm and do not hurt performance of the annuity plan when held to maturity.
Fixed annuities guarantee a set interest rate over a specific period. Annuities are straightforward, with no potential for agent salesmanship or client misunderstanding – – YOU KNOW WHAT YOU ARE GETTING. Nothing is left up to chance or agent interference. The insurance company in the policy (contract) spells out that exactly how your annuity works.
Stock brokers can’t promise return of capital, minimum guaranteed interest and systematic income as we can. Under securities law, they can’t promise anything at all other than to whack the account quarterly for the pro-rata advisory fee.
In the final analysis, there may be no real right or wrong in this issue. The only real requirement that planners must satisfy is ensuring that their clients understand the costs (both real and opportunity costs), fees and risks involved in their investments, whether they are annuities, mutual funds, CDs or any other vehicle.
The majority of women still unfortunately earn less than men during their working years. The statistics support the fact that most women live longer than men, and will likely end up alone. When it comes to retirement savings, women continue to lag behind men. They’ll spend enormous time and energy taking care of everyone else, then neglect themselves.
The good news for women: they live longer, so they will have longer to enjoy their retirement. The bad news: they live longer, and so their retirement will be much more expensive than for their male counterparts. While living longer is clearly a positive, it also means women have a greater possibility of outliving their retirement savings.
Women tend to outlive their husbands. Only one-third of women over sixty-five are married, and on average women will survive their husbands by fifteen years. The combination of being on their own and living longer means that women need far more retirement income than do most men.
Women have a 50% greater chance of being impoverished after age 65 than men. So they’re impoverished and, because they worked fewer years on account of child rearing, lower income and less time in the workforce also means lower Social Security income which is a potentially significant blow to retirement income.
Women often think that they can rely on their husbands’ pensions, but they are wrong. Let’s assume that a couple is living on the husband’s pension, and the woman dies. Though grief-stricken, the husband suffers no financial detriment, and goes on collecting his full pension. But let’s say the husband dies first, as is ordinarily the case.
His wife will probably get only 50% survivor benefits, which won’t come close to providing her the income she needs to carry on her life-style. No wonder 41% of older women are living close to the poverty line. Not surprisingly, most widows who are poor now were not poor before their husbands died.
Because so many women work in part-time jobs or for employers who don’t offer retirement benefits, fewer have defined benefit pension plans. And those with plans have smaller pensions because of less time in the workforce. Women may also be less likely to participate in retirement plans because of lower compensation.
The three top simple goals for financial well-being include making a plan, paying off your bills and planning for the future no matter what your gender. Men and women have the same financial opportunities (and risks), the same vehicles for saving, investing, and borrowing. However, their circumstances and choices can be very different.
With longer life expectancies and longer time horizons, women investors are well served to invest in asset classes that will continue to grow once their retirement begins. Putting most of your eggs in one basket can throw a wrench into your retirement plans.
Volatility in the stock market can make your stomach churn, when most of us are faced with financial trouble, we lose sleep and the volatility of an unstable stock market causes even the most savvy investors to reach for the Pepto-Bismol.
With all of the ups and downs in the stock market, many investors have been asking this question, “Is there a way to make money in the stock market and still have a way not to lose my principal is the market goes down?” Women who want to take advantage of the growth potential of the stock market should consider a fixed-indexed annuity. A fixed indexed annuity is an annuity that earns interest that is linked to a stock or other equity index. One of the most commonly used indices is the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500.
Considering this, there is one thing an annuity does really well, which is to provide a hedge against longevity risk, and if you are buying it for that reason, an annuity can be a good investment. An annuity allows an investor to convert a lump sum in a 401(k) or other investments into a stream of periodic income payments over the annuitant’s lifetime. Since you’re building a paycheck that might last 20 or 30 years, a woman retiree or near-retiree who wants to avoid the stock market and is looking for a predictable rate of return a fixed indexed annuity is certainly worth consideration..
A fixed indexed annuity with an income benefit can be a good idea as a safety net for a woman planning for retirement in the next 10 years or so: With fixed indexed annuities, you have the opportunity to grow your underlying assets with exposure to the stock market. But if the market has the kind of colossal downturn we’ve seen recently and you’re retiring at just the wrong time, you’ll know you have income protection.”
If you buy a inflation-adjusted immediate annuity, you’re done with your investment decisions regarding the money you spend on the annuity. Your payout is now locked in — and your retirement paycheck won’t be adjusted for changes in capital markets.
Many conservative women investors like the idea of an annuity because they like the certainty of an income stream over their life expectancy or their beneficiary in the case of a joint annuity. Annuities offer a measure of protection against market downturns, may provide a guaranteed investment return, and grow tax-sheltered until you withdraw the money.
Women should live confidently when it comes to money know-how because being strong savers, future planners and organizers comes pretty easily to the female being. So be strong, be confident, and be financially sound because you are informed, involved and intelligent knowing annuities is the best investment tool for safe and secure retirement income.
As the world recovers from one of its worst – and longest – recessions, each day, roughly 10,000 baby boomers turn 62—the average age at which people actually retire, according to a recent Gallup poll. Running out of money to live comfortably” was the biggest concern for members of both the Silent Generation (people aged 68-88) and boomers.
The Baby Boomers are still the ones really driving the bus in the stock market. As Baby Boomers face longer lifespans to fund, it’s an unfortunate reality of aging: our health declines as we get older along with the risk of losing our investment portfolio.
We’re really at a crossroads in terms of what direction the market will take. The stock market – while pricey – appears to be in good health. What’s going to be the impetus to get it going higher, or to see a correction? Despite the financial crisis and the “banker bashing” that ensued due to the perception of excessive risk-taking, don’t try to “time” the market. Unfortunately, bull markets, like the one we are in right now, make too many of us channel in Wall Street.
Too many people are forgetting once again to put their portfolio safety measures in place. You need to ask yourself how much risk are you willing to shoulder, and how much risk do you realistically need to transfer. Current low interest rates make any risk transfer move somewhat hard to swallow, but it’s a common sense medicine that needs to be revisited and implemented to reflect your specific situation.
Keep in mind, of course, is that the stock market is always vulnerable to surprises, including conflict overseas, terrorism, or another unforeseen catastrophe. If investors try to rush out the door at once, the resulting price impact could be substantial.
Bulls and bears continue to play a game of cat and mouse, with the bulls looking for a floor in the recent sell-off while the bears consider adding to shorts. You may be tempted to “take advantage” of volatility by looking for opportunities to “buy low and sell high.” In theory, this is a fine idea — but, unfortunately, no one can really predict market highs or lows. It’s important to never confuse genius with a bull market.
Bullish stock investors are feeling invincible. There are other signs of irrational exuberance. Investors are giving high-fives to each other because they are making so much paper money. This is a Market that Will Never Go Down, but I am being sarcastic. The scary part is that many people actually do believe this market will never go down. Most investors believe the Fed will protect their investments from any and all harm, but that can’t go on forever.
Although there are warning signals this bull market is coming to an end, you may have to wait a while longer. For now, the easiest, no-brainer investment is to follow the Fed and be blindly bullish. Don’t forget why many of you have refused to participate in a faux bull market that is pretty on the outside but deteriorating on the inside. If you look at previous market cycles, just when it seems too easy to make money, the bear appears and takes a huge bite.
Regardless of the platform or investment type, it’s important to be aware of the total costs associated with the investments available and to make sure you have a portfolio that is suitable for your risk capacity and risk preference. Just because you can afford to take on risk doesn’t mean you should. It may simply be a variant on the old saying that in the kingdom of the blind, the one-eyed man is king.
You’ve spent your life building your wealth, and you need someone who is both honest and competent to guide you on how to invest it. However, selecting a financial adviser is a decision that will affect the quality of your lifestyle for many years, even for the rest of your life. But financial advice can be a lot like flying: It’s hard to determine that the pilot doesn’t know what he or she is doing until the plane crashes.
There are many annual lists of the “best wealth managers” in other words, when you parse the lists they are in reality no more than just a ranking based on how much money each firm has under management. Having lots of assets is analogous to being an admiral in the Swiss Navy: a big title with little substance. No sane person should count on a broker for anything longer than the next trade.)
If you plan to take an income from your 401(k) fund then your investments need to keep up with the withdrawals, otherwise you could run out of money later on in retirement. If you take too much and investments don’t go the way you expect, your fund value and future income will fall. There are inherent risks with this approach – withdrawing capital when your portfolio is falling in value will compound your losses.
There are steps you can take to reduce this risk. The first is to ensure your portfolio is diversified and not entirely dependent on the performance of the stock market. The important point with income drawdown is the income is variable and not secure. Yet in retirement, it can be very valuable to have some level of secure income to cover basic living expenses and bills. Just as importantly, a secure lifetime income will last at least as long as you do, so income will never run out.
You might consider using some of your pension to provide the security of an annuity (which can be used to meet essential expenditure) with income drawdown (which offers the prospect of a growing income but is more risky). This can offer the best of both worlds.
Nobody really knows if the stock market is going up or down tomorrow let alone six months from now – unless they are breaking the law. U.S. stocks and the S&P 500 did fall 1.1 percent last week, ending the longest streak of advances this year, as speculation grew that the economy is recovering enough to justify higher interest rates sooner than anticipated.
While the market has since recovered (and then some), from the great recession, the experience has left an emotional scar and financial distrust among those already retired or close to retirement, especially with near 0% safe returns seriously impacting retirement income expectations.
Whether you are already retired or just approaching retirement, an important topic to consider is how to get a good return on your investments. At this point in life, you want to be able to live off the income from your investments, enjoying the freedom of retirement without having to worry about the financial side of things.
To accurately prepare for an unknown period of time, your portfolio not only needs to provide you with necessary income, but also grow enough to increase that income for as long as you need it. As you organize your retirement savings portfolio, it is important to start with setting aside an important sum of money for emergency purposes then look at investment options.
Remember that every type of investment comes with certain risks, so it’s important to be aware of that. Risks may sound scary, but planning early can help keep retirement income intact.
Longevity risk is the risk of outliving your money. Perhaps the hardest part of planning for retirement is the unknown length of time you will spend in retirement. Will you need income for 15 years, or 35? The longer the retirement period, the greater the impact the other retirement risks such as sequence risk and inflation risk, can have.
With increasing lifespans, you may spend 30-40 years in retirement. During working years, raises tend to offset the effect of inflation risk; in fact, income often grows faster than inflation. In retirement, however, inflation can be much more challenging because you are generally living on dividends and interest generated from your investment portfolio.
Sequence risk is the risk of receiving lower or negative returns early in a period (like retirement) when withdrawals are made from the underlying investments. The order or sequence of investment returns (not just the total overall return) can have a significant impact on retirees who are living off the income and capital of their investments.
You can have two portfolios with the same average return, the same amount of withdrawals and the same level of volatility, but if the negative returns occur in the beginning of retirement, that early decline will have a greater impact on the portfolio than if the drop occurred at the end.
No matter how good your investment returns are, the portfolio can only sustain a certain level of withdrawals over time (usually in the 3-5 percent range). This is referred to as withdrawal rate risk. In retirement, if you overspend (and withdraw too much from your investments), you run the risk of jeopardizing future spending ability.
The aim of setting a safe withdrawal limit is to ensure that you do not draw so heavily on your retirement savings – particularly when the market is down – that your capital cannot sustain your income throughout your retirement. It is suggested that you do not have to adhere to this “safe maximum” if you invest in a portfolio that is designed to generate a growing income.
If you are nearing, or already into retirement and you want to maintain a secure income stream, pass a steady income to your spouse, or gradually transfer an inheritance to your grandchildren. One of the investment options available to look at is an annuity.
An annuity is a financial product that pays you a regular income for a fixed period, or the rest of your life. They are often used for transforming a lump sum of money into a dependable income stream. Joint and survivor life annuities cover the lives of two individuals and payments are made as long as either you or your joint annuitant lives.
Life annuities provide a guaranteed income for as long as you live, helping to ensure you will not outlive your money. This is another worry-free option for retirement income. Annuities are issued by insurance companies, and they take on the risk. You give them a lump sum up front to buy the annuity, and in return, they agree to give you a fixed monthly income for the rest of your life. The longer you live, the more they need to pay out, so you never need to worry that the income will run out while you still need it